Georgia’s economic recovery has gained momentum over the past year, benefitting from the
resurgence in its diverse industrial base, gains in international trade and investment, as well as
the apparent bottoming of residential and commercial construction. Improvement is evident
across most industries and metropolitan areas. As we approach year-end, however, concerns have
arisen as to how the global economic slowdown and approach of the fiscal cliff will affect

Georgia’s economy. Georgia hosts numerous military installations, and the U.S. government has
long played a major role in the state’s economy. The latest data look encouraging, and we believe
the state will successfully navigate the rough waters that lie immediately ahead. Growth will likely
slow, however, as businesses await more clarity on the global economy and policy front.
Georgia’s economy was hit much harder by the recession than the nation as a whole. The greater
Atlanta area led the nation in homebuilding nearly every year during the housing boom, and
much of the development underway at the peak of the market was in communities along the
metro area’s outer periphery. When building activity slumped, the impact fell disproportionately
hard on smaller towns just outside the Atlanta metro area and had a devastating effect on the
community banks located in these areas. The hits to construction and financial services made it
that much tougher to recover, and many outlying areas continue to struggle.

The overall data have improved this past year. Nonfarm employment has increased 1.7 percent
over the past year and the unemployment rate has fallen 1.0 percentage points to 8.7 percent.
Private sector payrolls have risen 2.3 percent over the past year, with strong gains from business
and professional services, retail trade, healthcare and education and the leisure and hospitality
sectors. International trade and investment have played a larger role in Georgia’s recovery than
they have in the past, which has helped lift manufacturing activity. With global economic growth
remaining sluggish, we expect international trade to provide less of a boost in 2013.

Real gross domestic product fell more in Georgia than it did nationwide during the recession, and
this past year, the state’s economy grew slightly less than the nation, with real GDP for the state
rising just 1.7 percent. The drought significantly affected Georgia’s agriculture sector in 2011,
while the prolonged slump in residential and commercial construction weighed on mining and
construction. Utilities have also contributed less to the state’s growth, reflecting sluggish
industrial demand and less residential development.

We believe the state improved considerably during 2012. The Philadelphia Fed’s coincident index,
which is one of the best real-time measures of current economic activity, has remained solidly
positive throughout the year, while the leading index is up at a 2.5 percent pace over the past
three months, which is its best three-month showing since before the Great Recession.
Improvement is evident in most of the state’s major macroeconomic data, including private sector
employment, which is up 2.3 percent over the past year, and the unemployment rate, which has
fallen a full percentage point over the past year. In addition, personal income is up 3.4 percent.

Agriculture, which was one of the biggest negative contributors in 2011, appears to have made an
abrupt turnaround this past year. Agriculture now looks as though it will contribute solidly to
growth in 2012. Georgia appears to have largely dodged the worst effects of the drought that hit
other parts of the country in 2012. The peanut and pecan harvests look to be some of the best
ever. Corn, soybeans, and cotton harvests were also significantly improved over the prior year,
and exports of poultry and pork both increased. Moreover, the slide in mining output also appears
to have ended. Exports of kaolin, which is a type of white clay used in the making of products such
as paper, rubber and paint, were up 5.6 percent in 2011 and production held steady through the
first half of this year. Mining related to construction activity also appears to have bottomed.

Even though Georgia’s labor markets improved significantly during the past year, the latest data
may understate the magnitude of that improvement. Nonfarm employment has increased
1.7 percent over the past year, producing a net gain of 68,000 jobs. Private sector job growth was
considerably stronger than that, however, as federal, state and local governments cut 7,600 jobs
from their payrolls. Businesses have added 75,600 net new jobs over the past year. Moreover, the
latest Quarterly Census of Employment (QCEW) data show that previously reported data for the
state may have been slightly understated and suggest that employment growth will be revised up
slightly early next year. Finally, the civilian employment measure, which is calculated along with
the unemployment rate, has risen 2.5 percent over the past year, producing a net gain of
110,000 jobs. The larger household number is more in line with longer-run averages for the state
and seems consistent with the breadth of recent job gains.

Industrial Development Activity Is Really Beginning to Pay Off
Georgia has been remarkably successful at recruiting new industry in recent years, scoring major
investments from Mitsubishi, Kia, Caterpillar, Baxter International and most recently Carter’s.
The Georgia Department of Economic Development reported that it assisted 403 company
expansions or relocations during fiscal 2012, which is up 29 percent from the prior year. The
403 corporate expansions or location announcements listed a total of $5.97 billion in intended
investments and 28,776 new jobs. Of those projects announced in fiscal 2012, 36 percent were
new locations, including Baxter, Caterpillar and Bed, Bath & Beyond. Combined, these three
projects are expected to create 4,100 jobs. The remaining 64 percent of announcements were
expansions by existing firms, the largest of which were Kia Motors and Home Depot.

Foreign direct investment, which the Georgia Department of Economic Development notes
creates the most jobs per project, accounted for 29 percent of the year’s projects. Kia suppliers,
such as Mando and Daewon America, continue to add jobs near the Kia assembly plant near
LaGrange, while firms such as Kubota, Toyota Industries, Erdrich Umformtechnik, Dinex and
SANY, continue to add employment around the state. Foreign direct investment has long played
an important role in Georgia’s economy. As of 2010, foreign-controlled companies employed
183,400 workers across the state. Major sources of foreign investment in Georgia include firms
from Japan, the United Kingdom, Germany, Canada and Korea.

Many of the projects announced this past year will take years to reach their full potential, which
means the bulk of the employment impact remains ahead of us. One of the largest economic
development coups in recent years was landing the giant Mitsubishi Power Systems plant outside
Savannah. The 500,000-square foot facility, which recently shipped its first natural gas turbine, is
still being built and currently employs 350 workers and is expected to employ 500 workers by
2016. Another project whose influence continues to grow is Toyo Tire, which opened its plant in
Cartersville back in 2006, and has announced two major expansions that have significantly
boosted its size and employment base.

The time needed to fully build out new industrial projects is an important consideration when
reviewing the recent record of industrial announcements. Big wins like the recent Caterpillar
factory being built outside Athens and Baxter International’s $1.3 billion manufacturing plant
outside Covington will take some time to be built, and the bulk of new hiring may still be a few
years down the road. Moreover, if the past is any guide, these new facilities will be well placed to
receive additional investments as U.S. and global economic growth strengthens later in the
decade.
Georgia Will Likely Feel the Impact from Government Cutbacks
How Congress and the Administration deal with the fiscal cliff will likely have significant
ramifications on Georgia during the next few years. The state hosts a number of large military
installations, including Fort Benning, outside Columbus; Fort Stewart, outside Savannah; Fort
Gordon, near Augusta; Robins Air Force Base in Macon/Warner Robins and the Kings Bay
Submarine Base, near St. Mary’s. Atlanta also hosts a number of federal government functions,
including the headquarters for the Centers for Disease Control, regional offices for the IRS and
the Federal Aviation Administration, and a regional office for the U.S. Government Accountability
Office. In addition, Georgia has a large agriculture sector, which is nearly always vulnerable to
swings in federal agriculture polices. Finally, transfer payments as a share of personal income
have risen dramatically since the start of the recession and have failed to come down
meaningfully in recent years. As of the second quarter, transfer payments constitute 17.6 percent
of personal income, which means that more Georgia households have a stake in how the federal
government ultimately brings its financial house back into order.
Georgia Faces Near-Term Challenges from Slowing Global Growth
So far, Georgia’s diverse trade ties have helped insulate the state from the global economic
slowdown. After growing 20.1 percent in 2011, exports of Georgia-made goods eked out a
2.7 percent rise this past year. Georgia has strong trade ties with Asia, where growth is generally
holding up better than in Europe. China ranks as the state’s second-largest export market, while
Singapore and Japan rank fourth and fifth, respectively. In addition, the state’s exports to
Australia, which is the ninth-largest market for Georgia-made goods, have surged during the past
year, rising 24.4 percent through September. Trade with Europe has slowed. Manufacturing
exports to Germany, the state’s seventh-largest market, fell 8.5 percent this past year, while
exports to Italy and Spain tumbled 10.4 percent and 26.9 percent, respectively.

Recent news out of Europe has been discouraging. The Eurozone region has slipped back into
recession, as the deep problems plaguing Greece, Spain, Italy and Portugal are beginning to drag
down growth in Germany and France. In addition to the direct impact that slower global growth is
having on exports, economic troubles in Europe are also weighing on corporate earnings, which
affects several large multinationals with headquarters in the Atlanta area. Travel to Europe has
also slowed and growth in other important parts of the world, including Asia, Africa and Latin
America, has not made up for the shortfall. With profits coming under pressure from slowing
growth overseas, businesses will likely become a little more cautious about adding to payrolls in
all lines of business.

Georgia’s Ports Pave the Way for Thriving Export Industry
Despite the slowdown in the global economy, cargo volume through the Ports of Savannah and
Brunswick continues to grow. Georgia ports handled a record-high 569,984 roll-on/roll-off units
in FY 2012. In October, the Georgia Port Authority (GPA) reported that the volume of 20-foot
equivalent container units (TEUs) through the Port of Savannah has risen 4.4 percent in the first
nine weeks of the fiscal year. August alone saw 270,614 TEUs, which was the GPA’s
second-highest month ever. As encouraging data continue to come in, the state has ramped up
investment into the ports of Savannah and Brunswick. The ports have been one of the bright spots
in the state’s otherwise sluggish economic recovery. According to a recent study by the University
of Georgia’s Terry College of Business, Georgia’s ports support more than 352,000 full- and
part-time jobs in Georgia. These jobs, which are spread throughout all 159 of the state’s counties
range from manufacturing, agriculture, distribution, and warehousing.

The Port of Brunswick has become the third-busiest port for auto imports in the United States
and continues to see gains in cargo volume. In August, the GPA reported that total tonnage had
grown 30.2 percent in the fiscal year to date. Auto and machinery unit shipments through the
Colonel Island terminal grew 37 percent over the same period in fiscal 2012. Shipping through
Brunswick is expected to benefit from growth in the U.S. exports of motor vehicles and heavy
equipment.

The Port of Savannah continues to thrive as one of the nation’s leading container ports. The port
has attracted scores of retail distribution centers that bring products in from Asia and is poised
for even greater gains once the Savannah Harbor Expansion Project (SHEP), which will deepen
the harbor by five feet to a depth of 47 feet, is completed. The expansion is in anticipation of
increased and larger vessel traffic through the Panama Canal, which is undergoing an expansion
to double its capacity by 2014. Savannah hosts 40 weekly shipping services, the most on the East
Coast, and is the No.2 port in the nation, second only to Los Angeles, for the export of American
containerized goods. In fiscal 2012, the port handled a record-breaking 2.98 million TEUs, a
1.9 percent increase over year-earlier levels.

The Port of Savannah added five new shipping services to Asia in fiscal 2012. The port now hosts
more weekly services to Asia than any other East Coast port. This new wave of traffic through
Savannah will likely increase cargo volume through Georgia and will mark the largest ships ever
to do business through Georgia’s deepwater ports.

The state has approved the issuance of $181.1 million in general obligation bonds to fund SHEP,
which is scheduled to commence in fiscal 2013 and to be completed in 2016. The United States
Army Corps of Engineers (USACE) announced in April that the project is estimated to cost
$652 million and that it would provide an estimated $174 million in annual savings in shipping
costs for private companies. The state suspects this major expansion will make the Southeastern
United States, and more specifically, Georgia, a more attractive place for companies to relocate
and do business. Several major companies have already expressed their enthusiasm for the project, including Kia Motors Manufacturing Georgia, Caterpillar, The Home Depot, Volkswagen Group of America and Dollar Tree, Inc. The harbor deepening will allow for more efficient transportation of cargo, as larger ships will soon be able to enter the Port of Savannah. In addition, ships will be able to load to full capacity, which should reduce transportation costs and make the port a more attractive shipping alternative.

Georgia Budget Update and Outlook
The Georgia state budget situation has improved significantly over the past two fiscal years as revenue collections have gradually strengthened, while budget restraint has allowed the state to rebuild its rainy day fund. Through the end of the state’s 2012 fiscal year, which ended in June, revenue collections grew 4.8 percent on a year-over-year basis. Even with revenue collections below forecast, the state was able to end the year with a cash surplus of 2.0 percent of its total general fund spending. The growth in revenues allowed the state to increase total spending by 5.2 percent from fiscal 2011 to 2012.
The current 2013 fiscal year is also off to a good start with revenue collections through October up 4.8 percent from the year-earlier period. One of the key reasons why the state continues to see higher-than-average revenue collections is tied to the improving corporate tax collections. In addition to improving corporate tax collections, structural reforms to the state’s tax code that were passed during the last legislative session should also help to support future revenue growth. The higher revenue collections numbers allowed the state to grow expenditures in the current fiscal year by 4.5 percent over the previous fiscal year, increasing spending for some programs, including K-12 education. Among the key changes that were signed into law this spring were the requirements that online retailers needed to collect state sales tax and a new cap on exempt retirement income. In addition, several tax code changes were geared toward making the state more attractive for economic development. These changes include an elimination of state tax on energy used in manufacturing, eliminating sales tax on products used in the agricultural industry and the certainty of a permanent sales tax exemption on commercial aviation fuel.

Summary and Outlook
Given the high degree of uncertainty surrounding fiscal policy and the worsening economic situation in Europe, the outlook for the coming year is even more fraught with risk than usual. We are maintaining a slightly optimistic view for the state, which sees overall economic growth advancing at around the same pace in 2013 as it did in 2012, even though U.S. real GDP growth is expected to slow more significantly. Part of the reason Georgia is expected to hold up better than the nation is that the state fell much further during the recession and has so far recovered even less. Home building is more important to the state than it is to the nation as a whole, and that is one part of the economy that will almost certainly improve in the coming year. Georgia manufacturers are also less dependent on exports to Europe. Sales to China, the state’s fastest growing export market, have held up relatively well. More recently, China’s economy has shown signs of reaccelerating. Still, risks remain. Taxes are going up in 2013, which will cut into already sluggish income growth and spending. Implementing the sequester, as is currently planned, could lead to deep cuts in federal employment around the state and less business for federal contractors and defense firms. If all this happens, the housing recovery might also get snuffed out.

Forecasts are not built on ifs, however. We expect the fiscal cliff to be resolved in a way that does not result in willy-nilly cuts to government programs. Taxes will most certainly increase. The temporary 2 percentage point reduction in Social Security taxes will not likely be renewed, raising taxes by that percentage on the first $110,000 of income for all workers. The new taxes associated with the Affordable Care Act will also take hold and some portion of the Bush-era tax cuts will likely be reversed. Federal funding for extended unemployment insurance will also end, as will bonus depreciation for capital equipment purchases. The shift to austerity will present a new headwind for the economic recovery but will not uproot it. This is not a shift to the austerity programs that has befuddled the economies of southern Europe. Businesses and households will adjust and carry on.

Georgia is better positioned than many other states to weather the tightening in fiscal policy and global economic slowdown. The state’s economy has slowly but steadily battled its way back from the abyss it slipped into following the housing bust five years ago. A steady influx of industrial development announcements has helped bolster employment and restore confidence, while gradual progress at clearing out the massive inventory of foreclosures has allowed a nascent recovery to begin in residential construction. The Federal Reserve’s commitment to purchase mortgage-backed securities for the foreseeable future should also keep mortgage rates low and further abet the rebound in home sales and residential construction.

While conditions have improved considerably, Georgia has still not recovered. There are 235,000 fewer people working in Georgia today than there were prior to the recession and nonfarm employment remains 5.2 percent below its pre-recession level. Household finances are still in a precarious state, with debt burdens too high and incomes growing ever so slowly. Too many Georgians remain dependent on some sort of public assistance to get by and government assistance looks like it will become even less generous. Given this backdrop, we expect Georgia’s real GDP to slow ever so slightly from this year’s 2.5 percent growth to 2.3 percent in 2013 before rebounding at a 2.9 percent pace in 2014. Employment growth should actually improve a bit, at least on an annual average basis, aided by gains in construction and construction-related manufacturing. The disconnect between a slight decrease in Georgia’s real GDP growth and slightly stronger job growth may simply be an artifact of how the data are collected a reported. The GDP data lag notoriously, with the latest data being for calendar year 2011, and revisions to prior data tend to be substantial, which may ultimately reconcile the data in a way to where they are consistent after all.